Disclaimer: Information contained in the below article is not and should not be construed as investment advice, or read as a recommendation to use any particular investment strategy.
Overseas trade can benefit your business, but you’ll also have more to worry about – will the foreign exchange rate raise costs and lower your revenue? Is the SGD to RMB or USD rate fluctuating too much? How do you prepare to make transactions in foreign currencies?
If you find yourself asking these questions, here are some ways to manage your risk:
Understand your risks
There are different types of foreign exchange risk. Transaction exposure can happen if a business transaction is done in foreign currency. For example, your Singapore business buys something in USD, with an agreement to pay a few months later. If the SGD has weakened by the time your payment is due, you could end up paying more than you’d planned.
Translation exposure can happen when you convert currency in your business reports. You can manage this by showing your report in multiple currencies. Economic exposure can happen if your business operates in more than one country, and you can manage it by using a variety of financing sources, operating in more than one place, or carrying out risk-sharing agreements.
This article is mostly on ways to manage transactional exposure, but it’s important to understand how these risks can affect your business, so you can make decisions to protect it.
Arrange for a less risky payment
If you’re making large volumes of sales or selling to businesses, one way to manage your risk is to require all your payment in SGD, so your payer will bear the foreign currency risk. However, you might lose business opportunities by not using other currencies.
Since currency exchange rates don’t change much within a year, you could set short payment terms to help you get your money before the currency changes too much. You could also consider charging more to offset currency fluctuations, but there is still risk of more fluctuation than you predicted.
Open a foreign currency account
A foreign currency account is helpful if you deal mostly with one particular country or foreign partner. By opening a bank account especially for their currency, like a CIMB Foreign Currency Current Account, you can save a lot on foreign currency conversion fees, and worry less about currency fluctuations.
Buy foreign exchange contracts
You can offset currency risks by hedging with foreign contracts, such as forward contracts, which can be used by small businesses. With a forward contract, you agree to buy foreign currency from your bank at a set exchange rate in the future.
This means that you lock the price of the currency you have agreed to buy, so you can manage your money more easily once the cost is fixed. This also protects your business in case the value of the SGD drops. CIMB has a range of Foreign Exchange products to help you out. Check them out here.
Trading with an overseas partner always comes with some risks, but, you can keep it low with the right tools and strategy. Make sure to plan carefully and stay up-to-date on news that might affect currency fluctuations.